Energy Aagency Warns of Supply Crunch

Posted: Wed 6:28 AM, Nov 12, 2008&nbsp|&nbsp

Updated: Tue 2:28 PM, Nov 18, 2008

LONDON – The International Energy Agency on Wednesday predicted world energy demand will rise 1.6 percent per year on average between 2006 and 2030 and called for massive investment in energy infrastructure to prevent a supply squeeze.

The IEA's base scenario for energy demand has fallen due to the global economic slowdown and higher oil prices, but the agency stressed that a delay in spending on new projects due to the credit crisis could lead to a "supply crunch that could choke economic recovery."

The IEA expects demand for oil to rise from 85 million barrels per day currently to 106 million barrels per day in 2030 — 10 million barrels per day less than projected last year.

China and India continue to be the main drivers, accounting for more than half of incremental energy demand to 2030, but the Middle East, a longtime supplier, also emerges as a major new demand center.

The agency said that these trends call for energy supply investment of $26.3 trillion to 2030, or more than $1 trillion a year, but it noted that tight credit conditions could delay spending.

"While the situation facing the world is critical, it is vital we keep our eye on the medium to long term target of a sustainable energy future," Nobuo Tanaka, the Paris-based agency's executive director, told reporters at the release of its annual World Energy Outlook report in London.

The Organization of the Petroleum Exporting Countries, which pumps around 40 percent of the world's oil, cut output by 1.5 million barrels per day from Nov. 1 to counter a recent fall in the price of crude from a high of $147 in July to under $59 on Wednesday.

OPEC has also warned that crucial downstream investment — in refining and distribution — will be curtailed if the oil price is not maintained at a reasonable level.

The IEA has nearly doubled its forecast for the price of oil over the next twenty years, because of rising demand in the developing world as well as surging costs of production as oil needs to be sourced from more expensive offshore fields and state-run companies.

It hiked its forecast for the price of a barrel of oil in 2030 to just over US$200 in nominal terms, compared to its forecast last year of US$108 a barrel. Measured in constant dollars, it pegs oil at US$120 a barrel in 2030, up from last year's forecast of US$62.

Over 2008 to 2015, it predicts the price to average $100.

Tanaka said that "while market imbalances will feed instability, the era of cheap oil is over."

Fatih Birol, the IEA's chief economist, warned that even if growth in oil demand remained static in the years to 2030, production would need to increase by 45 million barrels per day, "which means bringing four new Saudi Arabia's on stream."

Saudi Arabia is OPEC's top producer and most influential member, and Birol said that the cartel would be increasingly central to the industry in coming years with its share of output likely to rise to just above 50 percent.

And while Birol believes that oil demand has peaked in the OECD, he expects primary energy demand in the Middle East to surge by 3.2 percent from 2006 to 2030.

Tanaka said that a fundamental change was underway in the upstream oil and gas industry — exploration and extraction — with international oil companies facing dwindling opportunities to increase their reserves and production.

In contrast, national oil companies are expected to account for 80 percent of the increase in both oil and gas production to 2030.

However, Tanaka said it was "far from certain" those companies would be willing to make the necessary investment themselves or to attract sufficient capital to keep up the necessary pace of investment."

The report also highlighted the expected rapid growth of renewable energy resources. It predicts that world renewables-based electricity generation — mostly hydro and wind power — will overtake gas to become the second-largest source of electricity, behind coal, before 2015.

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